decade, from strengthening Social Security and cutting taxes to extending health coverage. An important indicator of the permanence of the economic conditions of recent years will be whether the economy’s extraordinary performance continues in the next business cycle. Another is whether other advanced countries can replicate our higher growth and productivity, since a truly New Economy can hardly be confined to a single country.
Dr. Shapiro noted that it seemed beyond doubt that the U.S. economy entered a period of high performance in the 1990s and that this cycle looks quite different from others in recent memory. As previous expansions of the postwar period aged, productivity and output growth slowed, inflation rose, real wages stagnated, and profits declined. The current expansion has matured and lasted longer than any of its predecessors, and yet productivity gains have accelerated from an average rate of 1.4 percent a year in the early 1990s to 2.9 percent since 1995. Real GDP growth has quickened. It has averaged about 4 percent in years seven and eight of this expansion, as compared to 1.1 percent or less in those years of the long expansions of the 1960s and 1980s. Real hourly compensation has grown after a long period of relative stagnation. The just announced income numbers for 1999 show a record of five consecutive years of income gains for average households. At the same time, profits have continued to grow generally. Moreover, strong output and profits have fueled very vigorous growth in real business investment, producing a record seven straight years of double-digit gains in investment and equipment, most of it for information technology hardware and software. Finally, inflation continued to fall through most of this period and even now, after several years of full employment, remains moderate.
The New Economy could be defined by these results. We could also define it, he said, by its conditions. Behind higher productivity and growth, for example, lie at least three key developments:
Capital deepening—the acceleration in the growth of capital stock.
Disinflationary forces that have held back price pressures for more than a decade, including more intense competition associated with deregulation and expanding world trade, shifts to tight fiscal policies at home and abroad, and the falling prices of information technology itself.
The power of innovation.